FAQ

This article answers the most common questions about Principal and Yield Tokens, pool creation, and other protocol mechanics.

Principal Token (PT)

1. What are the main benefits of Principal Tokens? Obtaining Principal Tokens (e.g. PT-stETH) enables locking in the current APY of the respective interest-bearing token (e.g., stETH) for a fixed period until maturity. This approach provides a hedge against APY volatility, ensuring a fixed amount of underlying (e.g., ETH) is received at maturity.

2. How does Spectra ensure 1:1 PT redemptions for underlying at maturity? Spectra ensures each Principal Token (PT) is backed by a quantity of interest-bearing tokens (IBTs) equivalent to a fixed amount of the underlying asset at maturity unless there is a negative yield. While the protocol doesn't hold underlying tokens directly, it maintains that 1 PT can typically be redeemed for the underlying asset at maturity, except in cases of negative yield originating from the underlying layer (a project or protocol)

3. Can I sell my Principal Tokens (PTs) before maturity?

   Principal Tokens can be sold before maturity, either back to the pool or on secondary markets. The amount of underlying received will depend on the available liquidity at the time of the transaction.

4. What happens to my Principal Tokens at maturity? At/after maturity, each PT can be redeemed in a 1:1 ratio with its corresponding underlying token. For example, 1 PT-stETH can be redeemed for 1 ETH, assuming no negative yield. After the redemption, the PT token is burned.

5. Can I choose the maturity date when fixing rates?

   A precise maturity (redemption) date cannot be selected using tools like Fixed Rates. Users can only choose between fixed-rate products listed on the Fixed Rate page, with various maturity dates pre-defined by their respective pool creators.

Yield Token (YT)

1. What are the main benefits of Yield Tokens? Yield tokens (e.g., YT-stETH) are derivatives that offer exposure to the yield volatility of its interest-bearing token (e.g., stETH), akin to how holding a token like ETH exposes you to its price volatility. Holding onto Yield Tokens entitles the holder to ongoing yield accrual. If the implied future APY increases while holding the Yield Token, the holder will be entitled to greater yield accrual.

2. What happens to my Yield Tokens when they expire? The value of the Yield Tokens trends toward 0 as they approach expiry. Throughout their lifespan, YT holders continuously accrue yield, which can be claimed at any point before or after their expiration. When YTs expire, no further action is needed besides claiming the remaining (or fully) accrued yield.

Liquidity Pool (LP)

1. What are the main benefits of the LP token? The LP token is obtained by users who provide liquidity to or create a Spectra pool. It acts as a receipt, allowing its holder to claim their initial funds plus accrued pool fees. There are up to 5 yield streams in the LP token holders are exposed to: - Pool's swap fees - The native yield of the interest-bearing token token - Principal Token's fixed rate yield - Spectra's native APW emissions to pools - Incentives provided by 3rd parties

2. Can I withdraw my LP token at any time? Yes, withdrawing LP tokens is possible anytime before the pool's expiry.

Withdrawing from a pool before expiry can be done either one-sided or two-sided. The one-sided option, which involves converting LP tokens back to a single asset, may incur slippage and is subject to available liquidity.

1. What happens to the LP token when the pool expires? When the pool expires, LP holders can unwind to the underlying or interest-bearing token (IBT). This process is not subject to liquidity constraints since Principal Tokens (PTs) can be fully redeemed at maturity.

Pool Creation

1. How do I create a pool on Spectra? Spectra offers permissionless pool creation. To start a pool, a user needs any amount of a compatible interest-bearing token that adheres to the ERC-4626 standard or is Spectra-wrapped.

2. What is the pool's maturity? Maturity is a key pool parameter that sets the expiration date for yield derivatives. Depending on the pool creator's needs, it can range from 2 days to decades.

3. What is the target APY, and how do I source it? The target APY is an estimate of the average annual percentage yield the pool aims to achieve over its lifespan. To determine the target APY, the pool creator can utilize the native interest-bearing token (iBT) platform to check its current and historical APYs. Cross-referencing this data with reliable DeFi yield trackers, such as DefiLlama, provides a comprehensive view. Here's an example:

1. Can I set the pool fee parameter? The Spectra App automatically adjusts the pool fee based on the Target APY and maturity parameters to enable an efficient trading environment.

Advanced users can customize the pool fee parameter through the contracts.

1. What are the components of the output area? The pool creator receives an LP token composed of iBT and Principal Token. Yield Tokens are the result of the yield tokenization process; however, they are not a part of the pool composition. LP token holders remain entitled to fees from Yield Token (YT) swaps as they are driven by flash swaps utilizing the PT<>iBT pool. After a successful pool creation, LP and YT tokens are displayed in Portfolio under their respective tabs. Pool creators can sell YTs (subject to slippage) or continue earning yield by holding them.

The pool's displayed APY does not include the Yield Token's ongoing yield accrual.

Liquidity Provision (Addition)

This section covers cases for adding and removing liquidity from an existing pool.

1. How does the liquidity addition to an existing pool differ from the pool creation? Users providing liquidity to an existing pool do not need to set the Target APR and Maturity parameters; these actions are typically reserved for more advanced users.

   Additionally, users joining an existing pool can: a) Use either iBT or the Underlying as input b) Use the NPIM (No Price Impact Mode) to convert the whole input into the LP token or keep YT tokens aside.

For larger liquidity additions, using NPIM [ON] can help avoid slippage associated with one-sided liquidity additions.

1. How do I collect pool fees from liquidity provision? Liquidity providers accrue pool fees directly into the LP token, reflected in the pool's share holding more IBT/PT.

2. How do I collect and claim rewards (incentives) when providing liquidity? In addition to pool fees, liquidity providers are entitled to the protocol's native APW emissions and 3rd party incentives. A liquidity provider can claim earned APW rewards and incentives via a single drawer on the Spectra App by entering the Portfolio -> Liquidity tab -> LP position's [Manage] button -> Claim Rewards. The 3rd party rewards can be claimed

Liquidity Provision (Removal)

1. Is it possible to withdraw liquidity from the pool at any time?

   In most cases, users who join an existing pool can remove liquidity anytime with negliglible or zero slippage. Users with significant or full pool ownership who remove liquidity before the pool's maturity are subject to available liquidity without NPIM. To avoid slippage, using NPIM mode allows liquidity providers to receive iBT and PTs.

2. What happens if APW rewards and incentives are not claimed after removing liquidity? After withdrawing all LP tokens from a pool, a user can still claim its previously accrued APW and incentives via the [Claim All] button at the top of the portfolio page.

3. Can I partially remove liquidity from the pool? Yes, it is possible to remove liquidity partially from the pool.

4. Should NPIM (No Price Impact Mode) be used when removing liquidity? With the NPIM toggle turned ON, the output consists of interest-bearing tokens and Principal Tokens (the two components of the LP Token). In this scenario, users must wait for the PT's maturity to realize the underlying in a 1:1 ratio.

   With the NPIM toggle turned OFF, the output consists solely of interest-bearing tokens or the underlying asset. In this scenario, the PTs are swapped into iBT (or the underlying asset) at the available liquidity.

Other

1. What is an event of a negative yield? It is possible that ERC-4626 interest-bearing tokens (IBTs) may experience a decrease in their underlying share value. In such cases, the underlying backing of Principal Tokens (PTs) will decrease proportionally to maintain the protocol's solvency. This is the inverse of the share value increasing, which would result in yield that Yield Token (YT) holders could claim. Negative yield events reduce the amount of underlying assets backing each PT, impacting the value PT holders can redeem at maturity.

2. What is the impermanent loss like inside the pool? Impermanent loss (IL) is the difference in value between your holdings in the AMM pool and the asset(s) initially deposited. On Spectra, there are multiple assets to provide liquidity with (underlying, IBT, or tokenizing into PTs and YTs), and each method results in a different way of computing IL. However, several factors make IL negligible in most cases:

   • PTs are redeemable for one underlying value at maturity (unless there is a negative yield)

   • IBTs increase in underlying value within the pool

   • PT and IBT values are highly correlated

3. What is the difference between PT's maturity and LP/YT's expiry? These terms are synonymous; both refer to the pool maturity date set by the pool creator.